Market Overview

Bank of Commerce Holdings™ announces Third Quarter 2012 Results

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REDDING, Calif., Oct. 31, 2012 /PRNewswire/ -- Patrick J. Moty, President & CEO of Bank of Commerce Holdings (NASDAQ: BOCH), a $946.5 million bank holding company, and parent company of Redding Bank of Commerce™, and Roseville Bank of Commerce™ (a division of Redding Bank of Commerce) (the "Bank"), today reported net income available to common shareholders of $1.5 million, and diluted earnings per share (EPS) attributable to continuing and discontinuing operations of $0.12 and $(0.03), respectively, for the third quarter 2012.

Financial Highlights

  • Net income available to common shareholders of $1.5 million reflects a 14% decrease over the $1.7 million reported for the quarter ended September 30, 2011, and a 27% decrease over the $2.0 million recorded for the second quarter 2012.
  • Diluted EPS attributable to continuing operations of $0.12 compares to $0.08 reported for the same period a year ago and $0.11 for the prior quarter ended June 30, 2012.  Diluted EPS attributable to discontinued operations of $(0.03) compares to $0.02 reported for the same period a year ago and $0.01 for the prior quarter ended June 30, 2012.
  • Loan loss provisions for the third quarter were $1.9 million compared to $2.2 million for the third quarter 2011, and $1.7 million for the prior quarter ended June 30, 2012.
  • Nonperforming assets represented 3.03% of total assets in the current period versus 2.30% for the quarter ended September 30, 2011 and 2.41% for the quarter ended June 30, 2012.
  • On August 31, 2012 with an effective date of June 30, 2012, the Holding Company sold the 51% ownership interest (capital stock) in Bank of Commerce Mortgage for consideration of $5.2 million. The transaction is expected to be cash flow neutral, with $5.2 million resulting in a return of capital. The Mortgage Company will continue its operation under a different assumed name.

Patrick J. Moty, President and CEO commented:  "We continue to be pleased with the overall financial results of the company. Year to date, net income available to common shareholders is up 22% from the first nine months of 2011, and third quarter performance from continuing operations reflects a positive variance from the second quarter of 2012. But more importantly, last week we celebrated our 30th year in business. Throughout these last three decades, it's been our greatest pleasure assisting businesses and individuals in achieving their financial goals."

This quarterly press release includes forward-looking information, which is subject to the "safe harbor" created by the Securities Act of 1933, and Securities Act of 1934. These forward-looking statements (which involve the Company's plans, beliefs and goals, refer to estimates or use similar terms) involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors:

  • Competitive pressure in the banking industry and changes in the regulatory environment.
  • Changes in the interest rate environment and volatility of rate sensitive assets and liabilities.
  • The health of the economy declines nationally or regionally which could further reduce the demand for loans or reduce the value of real estate collateral securing most of the Company's loans.
  • Credit quality deteriorates which could cause an increase in the provision for loan losses.
  • Asset/Liability matching risks and liquidity risks.
  • Changes in the securities markets.

For additional information concerning risks and uncertainties related to the Company and its operations please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2011 and under the heading:  "Risk factors that may affect results" and subsequent reports on Form 10-Q and current reports on Form 8-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Table 1 below shows summary financial information for the quarters ended September 30, 2012 and 2011, and June 30, 2012.

Table 1








SUMMARY FINANCIAL INFORMATION


















 (Shares and dollars in thousands)

Quarter ended

Quarter ended



Quarter ended



September 30, 2012

September 30, 2011

Change


June 30, 2012

Change

Selective quarterly performance ratios







Return on average assets, annualized

0.72%

0.91%

-0.19%


0.96%

-0.24%

Return on average equity, annualized

6.15%

7.45%

-1.30%


8.14%

-1.99%

Efficiency ratio for quarter to date

52.06%

49.48%

2.58%


53.72%

-1.66%








Share and Per Share figures - Actual







Common shares outstanding at period end

16,121

16,991

(870)


16,265

(144)

Weighted average diluted shares

16,147

16,991

(844)


16,302

(155)

Diluted EPS attributable to continuing operations

$                        0.12

$                        0.08

$    0.04


$                        0.11

$    0.01

Diluted EPS attributable to discontinued operations

$                     (0.03)

$                        0.02

$ (0.05)


$                        0.01

$ (0.04)

Book value per common share

$                        5.67

$                        5.30

$    0.37


$                        5.54

$    0.13

Tangible book value per common share

$                        5.52

$                        4.94

$    0.58


$                        5.22

$    0.30








Capital Ratios








September 30, 2012

September 30, 2011

Change


June 30, 2012

Change

Bank of Commerce Holdings







Tier 1 risk based capital ratio

14.67%

15.01%

-0.34%


14.24%

0.43%

Total risk based capital ratio

15.92%

16.26%

-0.34%


15.49%

0.43%

Leverage ratio

13.21%

14.02%

-0.81%


13.41%

-0.20%








Redding Bank of Commerce







Tier 1 risk based capital ratio

14.11%

15.43%

-1.32%


13.56%

0.55%

Total risk based capital ratio

15.36%

16.69%

-1.33%


14.81%

0.55%

Leverage ratio

12.71%

13.25%

-0.54%


12.90%

-0.19%

















Bank of Commerce Holdings (the "Company") remains well capitalized. At September 30, 2012, the Company's Tier 1 and Total risk based capital ratios measured 14.67% and 15.92% respectively, while the leverage ratio was 13.21%.

Return on average assets (ROA) and return on average equity (ROE) for the three months ended September 30, 2012, was 0.72% and 6.15%, respectively, compared with 0.91% and 7.45%, respectively, for the three months ended September 30, 2011. The decrease in ROA and ROE for the three months ended September 30, 2012, compared with the same period a year ago, was primarily driven by a loss on the disposal of Bank of Commerce Mortgage (the "Mortgage Company"), a subsidiary of the Holding Company. 

On August 31, 2012 with an effective date of June 30, 2012, the Holding Company sold its 51% ownership interest (capital stock) in the Mortgage Company, a residential mortgage banking company headquartered in San Ramon, California. The Mortgage Company operates twenty-one offices in the states of California and Colorado, and is licensed to do business in California, Colorado, Oregon, Nevada and Texas. The Holding Company purchased a controlling interest in the Mortgage Company in May 2009, by acquiring 51% of their capital stock.

Under the terms of the Stock Purchase Agreement, the Holding Company sold its 51% interest in the Mortgage Company at a price of $5.2 million. In exchange for Bank of Commerce Holdings' 51% share of the Mortgage Company's equity, Bank of Commerce Holdings received consideration of $321 thousand in cash and a promissory note in the amount of $4.7 million (fair value of $3.9 million). The disposal of the Mortgage Company resulted in a $746 thousand loss on disposal of discontinued operations.

Balance Sheet Overview

As of September 30, 2012, the Company had total consolidated assets of $946.5 million, total net portfolio loans of $594.1 million, allowance for loan and lease losses of $10.6 million, total deposits of $691.6 million, and stockholders' equity of $111.4 million.

Overall, the net portfolio loan balance increased modestly during the third quarter. The Company's net loan portfolio was $594.1 million at September 30, 2012, compared with $583.6 million at June 30, 2012, an increase of $10.5 million, or 1.80%. The increase in net portfolio loans was primarily driven by net originations of commercial loans, and decreases in the allowance for loan and lease losses (ALLL). Commercial loan originations were a result of several large funding disbursements to local borrowers within our markets. During the third quarter 2012, the decrease in construction loans, when compared to the second quarter 2012, primarily resulted from the build out of one large project, which was subsequently refinanced into an owner occupied commercial real estate loan.

Table 2










PERIOD END LOANS



(Dollars in thousands)

September 30,

% of

September 30,

% of

Change

June 30,

% of


2012

Total

2011

Total

Amount

%

2012

Total










Commercial

$        165,915

27%

$        157,254

26%

$      8,661

6%

$        151,834

25%

Real estate – construction loans

21,346

4%

24,257

4%

(2,911)

-12%

29,048

5%

Real estate – commercial (investor)

215,836

36%

215,781

36%

55

0%

214,004

36%

Real estate – commercial (owner occupied)

74,667

12%

64,963

11%

9,704

15%

69,024

12%

Real estate – ITIN loans

61,020

10%

66,365

11%

(5,345)

-8%

62,189

10%

Real estate – mortgage

17,062

3%

19,653

3%

(2,591)

-13%

19,638

3%

Real estate – equity lines

44,041

7%

45,593

8%

(1,552)

-3%

45,761

8%

Consumer

4,530

1%

5,400

1%

(870)

-16%

4,396

1%

Other loans

62

0%

101

0%

(39)

-39%

51

0%

     Gross portfolio loans

604,479

100%

599,367

100%

5,112

1%

595,945

100%










Less:









Deferred loan fees, net

(216)


11


(227)

-100%

(160)


Allowance for loan and lease losses

10,560


10,590


(30)

0%

12,497


     Net portfolio loans

$        594,135


$        588,766


$      5,369

1%

$        583,608











Yield on loans

5.23%


5.56%


-0.33%


5.43%
















 

Table 3











PERIOD END CASH EQUIVALENTS AND INVESTMENT SECURITIES




(Dollars in thousands)

September 30,

% of

September 30,

% of

Change


June 30,

% of


2012

Total

2011

Total

Amount

%


2012

Total

Cash equivalents:










Cash and due from banks

$ 40,541

14%

$ 30,710

14%

$ 9,831

32%


$ 40,035

15%

Interest bearing due from banks

23,893

9%

27,476

12%

(3,583)

-13%


24,035

9%


64,434

23%

58,186

26%

6,248

11%


64,070

24%

Investment Securities-AFS:










U.S. Treasury and agency

0

0%

4,012

2%

(4,012)

-100%


0

0%

Obligations of state and political subdivisions

68,019

24%

60,417

26%

7,602

13%


76,179

28%

Mortgage backed securities

54,353

20%

46,169

21%

8,184

18%


52,842

20%

Corporate securities

49,747

18%

35,521

16%

14,226

40%


49,477

19%

Other asset backed securities

22,809

8%

19,585

9%

3,224

16%


22,850

9%


194,928

70%

165,704

74%

29,224

18%


201,348

76%











Investment Securities-HTM:










Obligations of state and political subdivisions

18,808

7%

0

0%

18,808

100%


0

0%











Total cash equivalents and investment securities

$ 278,170

100%

$ 223,890

100%

$ 54,280

24%


$ 265,418

100%











Yield on cash equivalents and investment securities

2.78%


2.64%


0.14%



2.80%



























The Company maintained a solid liquidity position during the reporting period. As of September 30, 2012, the Company maintained cash positions at the Federal Reserve Bank (FRB) and correspondent banks in the amount of $40.5 million. The Company also held certificates of deposits with other financial institutions in the amount of $23.9 million, which management considers highly liquid.

During August of 2012, the Company transferred $18.0 million in available-for-sale securities to the held-to-maturity category. Management determined that it had the positive intent to hold these securities for an indefinite period of time, due to their relatively higher yields, relatively lower coupons, longer maturities, and in some instances their CRA qualifications. The securities transferred had a total amortized cost of $18.0 million, fair value of $18.8 million, unrealized gross gains of $874 thousand, and unrealized gross losses of $40 thousand at the time of transfer. The net unrealized gain of $839 thousand which is recorded in other comprehensive income (OCI) net of tax will be amortized over the life of the securities as an adjustment to yield.

The Company's available-for-sale investment portfolio is generally utilized as a source of liquidity to fund other higher yielding asset opportunities, such as commercial and mortgage loan originations when required. Available-for-sale securities totaled $194.9 million at September 30, 2012, compared with $201.3 million at June 30, 2012. During the third quarter of 2012, management continued to strategically reposition the portfolio to maximize yields within the framework of our present risk tolerance and overall interest rate view. During the period, the Company focused on investing excess cash and reinvesting cash flows received from principal and interest pay downs from mortgage backed securities and collateralized mortgage obligations into bank qualified municipal bonds and corporate bonds.

Purchases of corporate bonds were focused on relatively short term (maturities ranging between four to six years), high quality debt instruments issued by large financial institutions. Management believes the risk adjusted yield spreads of these securities compared to what is currently offered in the treasury markets or mortgage backed securities markets provides the Company with certain opportunities to maintain net interest margins without extending too long on the yield curve.

Purchases of municipal bonds focused on bank qualified general obligation and revenue bonds where the debt proceeds are used to fund the operations of state and local essential services. The municipal bonds purchased generally had maturities ranging from five to eight years, with some bonds having call dates within two to four years. Management monitors the financial performance of the municipal bond portfolio on an ongoing basis. Should the outcome of these reviews indicate declining credit quality, inadequate debt service coverage, or if the bonds have fallen outside of our risk tolerance, the bonds will be sold in the open market.

During the third quarter 2012, the Company purchased forty securities with a weighted average yield of 2.75%, and sold fifteen securities with a weighted average yield of 3.30%. Pursuant to the sales activity, the Company recorded $550 thousand in realized gains on the sales of securities. 

At September 30, 2012, the Company's net unrealized gain on available-for-sale securities was $4.6 million, compared with $2.8 million net unrealized gains at June 30, 2012. The favorable change in net unrealized gains was primarily due to increases in the fair values of the Company's corporate and municipal bond portfolios, primarily driven by changes in market interest rates, and the contraction of market spreads subsequent to the initial purchase of these bonds.

Table 4











QUARTERLY AVERAGE DEPOSITS BY CATEGORY




(Dollars in thousands)

Q3

% of

Q3

% of

Change


Q2

% of


2012

Total

2011

Total

Amount

%


2012

Total

Demand deposits

$       120,821

18%

$         99,088

15%

$      21,733

22%


$     108,940

16%

Interest bearing demand

213,217

31%

167,489

26%

45,728

27%


187,288

28%

Total checking deposits

334,038

49%

266,577

41%

67,461

25%


296,228

44%

Savings

90,856

13%

94,287

14%

(3,431)

-4%


88,869

14%

Total non-time deposits

424,894

62%

360,864

55%

64,030

18%


385,097

58%

Time deposits

264,244

38%

290,811

45%

(26,567)

-9%


282,490

42%

Total deposits

$       689,138

100%

$       651,675

100%

$      37,463

6%


$     667,587

100%











Weighted average rate on total deposits

0.78%


1.13%


-0.36%



0.90%


Third quarter 2012 average total deposits increased 6% or $37.5 million to $689.1 million from the third quarter in 2011. Non maturing core deposits increased $46.0 million or 13% year over year.  Insured Cash Sweep (ICS) deposits totaling $23.6 million as of September 30, 2012 are included in interest bearing demand.  ICS deposits are brokered money market deposit accounts which are considered non core for regulatory purposes.

Operating Results for the Third Quarter 2012

Through active management and servicing of problem credits and maintenance of a relatively solid net interest margin, the Company has remained profitable over an extended period despite continued weak economic conditions. Accordingly, the Company continues to be well positioned to take advantage of strategic growth opportunities.

Net income attributable to Bank of Commerce Holdings was $1.7 million for the three months ended September 30, 2012, compared with $2.3 million for the three months ended June 30, 2012, and $2.0 million for the three months ended September 30, 2011. Net income available to common shareholders was $1.5 million for the three months ended September 30, 2012, compared with $2.0 million for the three months ended June 30, 2012, and $1.7 million for the three months ended September 30, 2011. During the third quarter of 2012, diluted earnings per share attributable to continuing operations increased $0.01 per share when compared to the second quarter of 2012, and increased $0.04 per share compared to the third quarter of 2011.  During the third quarter of 2012, diluted earnings per share attributable to discontinued operations decreased $0.04 per share when compared to the second quarter of 2012, and decreased $0.05 per share compared to the third quarter of 2011.

The decrease in diluted earnings per share from discontinued operations during the third quarter 2012 as compared to the prior quarter and the same period a year ago was primarily driven by the $746 thousand loss on disposal of the Mortgage Company.

The Company continued to pay quarterly cash dividends of $0.03 per share during 2012, consistent with the quarterly dividends paid in 2011.

Table 5










SUMMARY INCOME STATEMENT





(Dollars in thousands)

Q3

Q3

Change


Q2

Change


2012

2011

Amount

%


2012

Amount

%

Net interest income

$    9,115

$      8,444

$       671

8%


$   8,714

$       401

5%

Provision for loan and lease losses

1,900

2,211

(311)

-14%


1,650

250

15%

Noninterest income

1,419

1,049

370

35%


1,182

237

20%

Noninterest expense

5,484

4,697

787

17%


5,316

168

3%

Income before income taxes

3,150

2,585

565

22%


2,930

220

8%

Provision for income taxes

923

905

18

2%


857

66

8%

Net income

2,227

1,680

547

33%


2,073

154

7%

Discontinued Operations:









Income (loss) from discontinued operations

(746)

1,210

(1,956)

-162%


622

(1,368)

-220%

Income tax expense associated with income (loss)from discontinued operations

(239)

499

(738)

-148%


271

(510)

-188%

Net income (loss) from discontinued operations

(507)

711

(1,218)

-171%


351

(858)

-244%

Less: Net income from discontinued operations attributable to noncontrolling interest

0

348

(348)

-100%


172

(172)

-100%

Net income attributable to Bank of Commerce Holdings

1,720

2,043

(323)

-16%


2,252

(532)

-24%

Less: preferred dividend and accretion on preferred stock

250

334

(84)

-25%


248

2

1%

Income available to common shareholders

$    1,470

$      1,709

$    (239)

-14%


$   2,004

$    (534)

-27%

Basic EPS attributable to continuing operations

$      0.12

$        0.08

$      0.04

50%


$     0.11

$      0.01

9%

Basic EPS attributable to discontinued operations

$   (0.03)

$        0.02

$   (0.05)

-250%


$     0.01

$   (0.04)

-400%

Average basic shares

16,147

16,991

(844)

-5%


16,302

(155)

-1%

Diluted EPS attributable to continuing operations

$      0.12

$        0.08

$      0.04

50%


$     0.11

$      0.01

9%

Diluted EPS attributable to discontinued operations

$   (0.03)

$        0.02

$   (0.05)

-250%


$     0.01

$   (0.04)

-400%

Average diluted shares

16,147

16,991

(844)

-5%


16,302

(155)

-1%















Net interest income for the three months ended September 30, 2012 was $9.1 million, an increase of $671 thousand or 8% compared to the same period in 2011, and an increase of $401 thousand compared with the three months ended June 30, 2012. The increase in net interest income during the three months ended September 30, 2012 compared to the same period a year ago was primarily driven by increased volume in the investment securities portfolio, decreased cost of funds resulting from the re-pricing of deposits into lower rates, and lower average balances in time deposits, partially offset by decreased interest income realized from the loan portfolio.

The decrease in loan interest income was primarily driven by the downward re-pricing of the ITIN variable rate 1-4 family mortgage loans. During the three months ended September 30, 2012, the ITIN portfolio with an average balance of $61.7 million yielded 3.59% compared to a yield of 4.26% during the same period a year ago.

Interest income recognized from the investment securities portfolio increased $542 thousand during the three months ended September 30, 2012, compared with the same period a year ago. During the final six months of 2011, the entire pool of U.S Agencies with yields averaging 2%, were either sold or called away, with the majority of the cash flows reinvested into higher yielding corporate bonds, municipal bonds, and asset backed securities. Accordingly, the portfolio composition during the third quarter of 2012 was more heavily weighted with higher yielding securities, compared to the same period a year ago. Furthermore, despite net purchases of municipal bonds and corporate bonds at relatively lower yields compared to like kind bonds in our existing portfolio, we managed to maintain a modestly higher overall portfolio yield compared with the same period a year ago. The tax equivalent yield from the investment securities portfolio for the three months ended September 30, 2012 was 3.84%  compared with 3.68% during the same period a year ago.

Table 6








NET INTEREST SPREAD AND MARGIN




(Dollars in thousands)

Q3

Q3

Change


Q2

Change


2012

2011

Amount


2012

Amount

Tax equivalent yield on average interest earning assets

4.68%

4.87%

-0.19%


4.64%

0.04%

Rate on average interest bearing liabilities

0.69%

1.05%

-0.36%


0.77%

-0.08%

Net interest spread

3.99%

3.82%

0.17%


3.87%

0.12%

Net interest margin on a tax equivalent basis

4.14%

4.03%

0.11%


4.03%

0.11%








Average earning assets

$      907,675

$      859,919

$        47,756


$    891,529

$      16,146

Average interest bearing liabilities

$      708,163

$      686,422

$        21,741


$    704,440

$        3,723










The net interest margin (net interest income as a percentage of average interest earning assets) on a fully tax-equivalent basis was 4.14% for the three months ended September 30, 2012, an increase of 11 basis points compared to the same period a year ago. The increase in net interest margin during the three months ended September 30, 2012 compared to the same period a year ago primarily resulted from a 30 basis point decline in interest expense to average earning assets, partially offset by a 19 basis point decrease in yield on earning assets. With decreasing elasticity in our funding costs and historically low interest rates, maintaining net interest margins in the foreseeable future will present significant challenges. Accordingly, management will continue to pursue organic loan growth, and actively manage the investment securities portfolio to maintain the yield on earning assets.

Noninterest income for the three months ended September 30, 2012 was $1.4 million, an increase of $370 thousand or 35% when compared to the same period a year ago. The following table presents the key components of noninterest income for the three months ended September 30, 2012 and 2011, and June 30, 2012:

Table 7










NONINTEREST INCOME





(Dollars in thousands)

Q3

Q3

Change


Q2

Change


2012

2011

Amount

%


2012

Amount

%

Service charges on deposit accounts

$       49

$       50

$        (1)

-2%


$       50

$        (1)

-2%

Payroll and benefit processing fees

122

99

23

23%


118

4

3%

Earnings on cash surrender value - Bank owned life insurance

114

117

(3)

-3%


114

0

0%

Gain (loss) on investment securities, net

550

532

18

3%


542

8

1%

Merchant credit card service income, net

39

39

0

0%


38

1

3%

Other income

545

212

333

157%


320

225

70%

Total noninterest income

$  1,419

$  1,049

$      370

35%


$  1,182

$      237

20%










Payroll and benefit processing fees increased by $23 thousand for the three months ended September 30, 2012 compared to the same period a year ago. In September 2011, the Bank acquired eighty payroll processing customer relationships from a local payroll processing sole proprietorship. As a result of the transaction, the Company has recognized increased payroll and benefit processing fees during the current period.

Gains on the sale of investment securities increased by $18 thousand for the three months ended September 30, 2012 compared to the same period a year ago. During the third quarter of 2012, the Company sold fifteen securities compared to eleven securities during the same period a year ago. The sales activity during the third quarter of 2012 resulted in gross gains of $579 thousand and gross losses of $29 thousand.

The major components of other income are fees earned on ATM transactions, safe deposits, and online banking. Also included in other income are gains on litigation, FHLB dividends, and wealth management commissions. The increase in other income for the three months ended September 30, 2012, compared to the same period a year ago and the prior quarter, was primarily driven by a $240 thousand favorable litigation settlement with the servicer of a purchased pool of loans. Changes in the other components of other income are a result of normal operating activities.

Noninterest expense for the three months ended September 30, 2012 was $5.5 million, an increase of $787 thousand or 17% compared to the same period a year ago. The following table presents the key elements of noninterest expense for the three months ended September 30, 2012 and 2011, and June 30, 2012:

Table 8










NONINTEREST EXPENSE





(Dollars in thousands)

Q3

Q3

Change


Q2

Change


2012

2011

Amount

%


2012

Amount

%

Salaries and related benefits

$  2,732

$  2,507

$     225

9%


$  2,595

$       137

5%

Occupancy and equipment expense

508

548

(40)

-7%


473

35

7%

Write down of other real estate owned

0

0

0

0%


425

(425)

-100%

FDIC insurance premium

202

300

(98)

-33%


198

4

2%

Data processing fees

94

92

2

2%


115

(21)

-18%

Professional service fees

255

229

26

11%


304

(49)

-16%

Deferred compensation expense

150

136

14

10%


146

4

3%

Other expenses

1,543

885

658

74%


1,060

483

46%

Total noninterest expense

$  5,484

$  4,697

$     787

17%


$  5,316

$       168

3%










Salaries and related benefits expense for the three months ended September 30, 2012 was $2.7 million, an increase of $225 thousand or 9% compared to the same period a year ago. The increase in salary and related benefit expense during the third quarter compared to the same period a year ago was primarily driven by a $149 thousand increase in the employee cash incentive program accrued at the Bank.

Although real estate values have generally stabilized in our markets, the lagging impact from depressed values continues to affect our loan portfolio.  As such, a continuance of foreclosure activity has resulted in migration of properties into OREO. Particularly impacted by the depressed real estate market are our ITIN loans, which consist of 1-4 family mortgages. At September 30, 2012, thirteen ITIN 1-4 family residential properties consisting of an aggregate principal balance of $938 thousand were held in OREO. These properties are generally sold within four months from foreclosure, and generally have not had further impairment subsequent to transferring into OREO. Furthermore, at September 30, 2012, three commercial real estate properties consisting of an aggregate principal balance of $2.1 million, and a 1-4 family construction property with a principal balance of $24 thousand were held in OREO. The commercial real estate properties carry significantly higher appraised values than 1-4 family residential properties, and have much longer disposition times. Accordingly, the entire write down of OREO in the previous quarter was related to the commercial properties. During the third quarter of 2012, no further impairment was deemed necessary for either the commercial properties or the 1-4 family properties.

The decrease in FDIC assessments during the three months ended September 30, 2012, compared to the same period a year ago resulted from improvements in the Bank's overall deposit assessment risk profile. Additional discussion on FDIC insurance assessments is provided in our most recent 10-K filed on March 9, 2012, in Item 1 under the caption Federal Deposit Insurance Premiums.

Professional service fees encompass audit, legal and consulting fees. Increases in professional service fees for the three months ended September 30, 2012 compared to the same period a year ago were primarily driven by increased legal costs associated with the sale of the Mortgage Company, commissions paid pursuant to the Company's stock repurchase plan, and the recruitment of certain banking professionals.

Other expenses for the three months ended September 30, 2012, were $1.5 million, an increase of $658 thousand or 74% compared to the same period a year ago. The increase in other expenses was primarily driven by increased losses on the sale of OREO properties, prior year tax expenses, and increased amortization of the California Affordable Housing credits. During the three months ended September 30, 2012, the Company sold six properties for an aggregate loss of $335 thousand, compared to aggregate losses of $65 thousand during the same period a year ago. In addition the Bank recognized additional prior year tax expenses of $142 thousand resulting from a franchise tax board audit, and recognized a $48 thousand increase in the amortization of the California Affordable Housing tax credits.

Table 9



ALLOWANCE ROLL FORWARD

(Dollars in thousands)

Q3

Q2

Q1

Q4

Q3


2012

2012

2012

2011

2011

Beginning balance

$      12,497

$      11,373

$      10,622

$      10,590

$      13,363

Provision for loan loss charged to expense

1,900

1,650

1,300

1,800

2,211

Loans charged off

(4,011)

(880)

(788)

(1,996)

(5,355)

Loan loss recoveries

174

354

239

228

371

Ending balance

$      10,560

$      12,497

$      11,373

$      10,622

$      10,590







Gross portfolio loans outstanding at period end

$    604,479

$    595,945

$    590,811

$    594,372

$    599,366







Ratio of allowance for loan losses to total loans

1.75%

2.10%

1.92%

1.79%

1.77%

Nonaccrual loans at period end:






     Commercial 

$        3,330

$               0

$               0

$             49

$           228

     Construction

77

104

105

106

1,650

     Commercial real estate

10,393

6,160

5,943

6,104

3,034

     Residential real estate

11,733

13,943

14,544

14,806

14,010

     Home equity

95

298

302

353

353

        Total nonaccrual loans

$      25,628

$      20,505

$      20,894

$      21,418

$      19,275

Accruing troubled debt restructured loans






     Commercial

$             72

$             56

$               0

$               0

$               0

     Construction

0

0

0

0

0

     Commercial real estate

9,790

12,798

14,584

14,590

16,811

     Residential real estate

3,117

2,750

2,920

2,870

3,279

     Home equity

501

436

401

423

426

        Total accruing restructured loans

$      13,480

$      16,040

$      17,905

$      17,883

$      20,516







All other accruing impaired loans

7,281

472

472

472

908







Total impaired loans

$      46,389

$      37,017

$      39,271

$      39,773

$      40,699







Allowance for loan and lease losses to nonaccrual loans at period end

41.20%

60.95%

54.43%

49.59%

54.94%

Nonaccrual loans to total loans

4.24%

3.44%

3.54%

3.60%

3.22%

Allowance for loan and lease losses to impaired loans

22.76%

33.76%

28.96%

26.71%

26.02%

The ALLL totaled $10.6 million and $12.5 million at September 30, 2012 and June 30, 2012, respectively. The decrease in the ALLL as of September 30, 2012 compared to June 30, 2012 is principally attributable to net charge offs exceeding provisions for loan and lease losses in the current period. There were a number of factors that contributed to the increase in net charge offs, including more impairment charges on both existing impaired loans and newly classified impaired loans.

Net charge offs were $3.8 million for the three months ended September 30, 2012, compared with net charge offs of $526 thousand for the three months ended June 30, 2012. The third quarter charge offs were centered in commercial real estate, 1-4 family residential, and home equity loans. Overall, the loan portfolio is showing signs of stabilization, however there are lingering weaknesses where the borrower's business revenue is tied to real estate. At September 30, 2012, the loan portfolio reflects modest decreases in total past due loans, and increases in impaired loans, compared to December 31, 2011. In addition, as of September 30, 2012, there was a net migration of loans into internal risk rating of substandard, compared to amounts reported as of December 31, 2011. The commercial real estate loan portfolio and commercial loan portfolio will continue to be influenced by weakness in real estate values, the effects of high unemployment levels, and general overall weakness in economic conditions. As such, management will continue to aggressively identify and dispose of problematic assets which could lead to an elevated level of charge offs. Specific problem loans that are collateral dependent have been identified for impairment and are recorded at the fair value (appraised value) of the collateral less cost to sell. Specific problem loans that are not collateral dependent have been allocated a specific reserve based on expected future cash flows. Despite the current level of charge offs, management believes the Company's ALLL is adequately funded given the current level of credit risk.

At September 30, 2012, the recorded investment in loans classified as impaired totaled $46.4 million, with a corresponding valuation allowance (included in the ALLL) of $2.8 million. The valuation allowance on impaired loans represents the impairment reserves on performing restructured loans, other accruing loans, and nonaccrual loans. At June 30, 2012, the total recorded investment in impaired loans was $37.0 million, with a corresponding valuation allowance (included in the ALLL) of $3.7 million. The increase in impaired loans in the third quarter of 2012, compared with recorded amounts in the second quarter of 2012, primarily resulted from the classification of three loans with an aggregate balance of $6.8 million, which were associated with one borrower. 

Loans are reported as troubled debt restructurings (TDR) when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include a reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity date(s) significantly, or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as the Bank will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows of the restructured loans, discounted at the effective interest rate of the original loan agreement. These impairment reserves are recognized as a specific component to be provided for in the ALLL.

During the three months ended September 30, 2012, the Company restructured seven loans, two of which were restructured to grant interest rate concessions, and the five remaining loans were restructured in a manner that granted a combination of interest rate, maturity, or payment deferral concessions. During the three months ended September 30, 2011, the Company restructured eight loans, all of which were restructured to grant interest rate concessions. All loans reclassified as TDR's during the three months ended September 30, 2012 and 2011 were on nonaccrual status.

As of September 30, 2012, the Company had $27.7 million in TDRs compared to $29.6 million as of June 30, 2012.  As of September 30, 2012, the Company had one hundred and one loans that qualified as TDRs, of which sixty-five were performing according to their restructured terms. TDRs represented 4.59% of gross portfolio loans as of September 30, 2012, compared with 4.97% at June 30, 2012. 

Table 10







TROUBLED DEBT RESTRUCTURINGS

(Dollars in thousands)

September 30,

June 30,

March 31,

December 31,

September 30,


2012

2012

2012

2011

2011

Nonaccrual

$          14,259

$          13,607

$          13,324

$          13,418

$            9,155

Accruing

13,480

16,040

17,904

17,883

20,516

Total troubled debt restructurings

$          27,739

$          29,647

$          31,228

$          31,301

$          29,671

Percentage of total gross portfolio loans

4.59%

4.97%

5.29%

5.27%

4.95%

Nonperforming loans, which include nonaccrual loans and accruing loans past due 90 days or more, totaled $25.6 million or 4.24% of total portfolio loans as of September 30, 2012, as compared to $20.6 million, or 3.45% of total loans at June 30, 2012. Nonperforming assets, which include nonperforming loans and foreclosed real estate, totaled $28.7 million, or 3.03% of total assets as of September 30, 2012, compared with $23.2 million, or 2.41% of total assets as of June 30, 2012.

Table 11







NONPERFORMING ASSETS

 (Dollars in thousands)

September 30,

June 30,

March 31,

December 31,

September 30,


2012

2012

2012

2011

2011







Commercial

$             3,330

$                    0

$                    0

$                  49

$                228

Real estate construction






     Commercial real estate construction

0

0

0

0

1,543

     Residential real estate construction

77

104

105

106

107

Total real estate construction

77

104

105

106

1,650

Real estate mortgage






     1-4 family, closed end 1st lien

2,315

4,114

4,378

4,474

4,205

     1-4 family revolving

95

298

302

353

353

     ITIN 1-4 family loan pool

9,418

9,829

10,166

10,332

9,805

Total real estate mortgage

11,828

14,241

14,846

15,159

14,363

Commercial real estate

10,393

6,160

5,943

6,104

3,034

Total nonaccrual loans

25,628

20,505

20,894

21,418

19,275

90 days past due and still accruing

0

65

0

95

373

     Total nonperforming loans

25,628

20,570

20,894

21,513

19,648







Other real estate owned

3,052

2,647

1,913

3,731

1,665

Total nonperforming assets

$           28,680

$           23,217

$           22,807

$           25,244

$           21,313







Nonperforming loans to total loans

4.24%

3.45%

3.54%

3.62%

3.28%

Nonperforming assets to total assets

3.03%

2.41%

2.45%

2.68%

2.30%

As of September 30, 2012, nonperforming assets of $28.7 million have been written down by 23%, or $6.7 million, from their original balance of $37.6 million.

Table 12







OTHER REAL ESTATE OWNED ACTIVITY

(Dollars in thousands)

Q3

Q2

Q1

Q4

Q3


2012

2012

2012

2011

2011

Beginning balance

$               2,647

$               1,913

$               3,731

$               1,665

$               1,793

     Additions to OREO

4,046

1,817

134

2,399

129

     Dispositions of OREO

(3,641)

(658)

(1,952)

(333)

(257)

     OREO valuation adjustment

0

(425)

0

0

0

Ending balance

$               3,052

$               2,647

$               1,913

$               3,731

$               1,665







At September 30, 2012, the recorded investment in OREO was $3.1 million compared to $2.6 million at June 30, 2012. For the three months ended September 30, 2012, the Company transferred foreclosed property from ten loans in the amount of $4.0 million to OREO and adjusted the balances through charges to the ALLL in the amount of $122 thousand relating to the transferred foreclosed property. During this period, the Company sold six properties with balances of $3.6 million for a net loss of $335 thousand. The September 30, 2012 OREO balance consists of seventeen properties, of which thirteen are secured with 1-4 family residential real estate in the amount of $938 thousand. The remaining four properties consist of improved commercial land in the amount of $750 thousand, a vacant residential lot in the amount of $24 thousand, and two commercial real estate properties in the amount of $1.3 million

The following table presents an income statement summary for the periods indicated below.

 

Table 13

INCOME STATEMENT

(Amounts in thousands, except for per share data)

Q3

Q3

Change

Q2

Full Year

Full Year


2012

2011

$

%

2012

2011

2010

Interest income:








Interest and fees on loans

$ 8,462

$ 8,794

$ (332)

-4%

$ 8,288

$ 35,084

$ 37,087

     Interest on tax-exempt securities

612

470

142

30%

585

2,014

1,692

     Interest on U.S. government securities

426

437

(11)

-3%

408

2,123

2,083

     Interest on other securities

841

548

293

53%

794

2,410

1,616

          Total interest income

10,341

10,249

92

1%

10,075

41,631

42,478

Interest expense:








     Interest on demand deposits

147

191

(44)

-23%

153

787

968

     Interest on savings deposits

90

172

(82)

-48%

105

792

921

     Interest on certificates of deposit

866

1,204

(338)

-28%

1,005

4,912

6,151

     Interest on securities sold under repurchase agreements

6

9

(3)

-33%

7

43

52

     Interest on FHLB borrowings

(4)

135

(139)

-103%

(47)

579

626

     Interest on other borrowings

121

94

27

29%

138

363

679

          Total interest expense

1,226

1,805

(579)

-32%

1,361

7,476

9,397

          Net interest income

9,115

8,444

671

8%

8,714

34,155

33,081

Provision for loan and lease losses

1,900

2,211

(311)

-14%

1,650

8,991

12,850

  Net interest income after provision for loan and lease losses

7,215

6,233

982

16%

7,064

25,164

20,231

Noninterest income:








     Service charges on deposit accounts

49

50

(1)

-2%

50

192

260

     Payroll and benefit processing fees

122

99

23

23%

118

458

448

     Earnings on cash surrender value – Bank owned life insurance

114

117

(3)

-3%

114

465

438

     Gain on investment securities, net

550

532

18

3%

542

1,550

1,981

     Gain on settlement of put reserve

0

0

0

0%

0

0

1,750

     Merchant credit card service income, net

39

39

0

0%

38

376

235

     Other income

545

212

333

157%

320

850

874

          Total noninterest income

1,419

1,049

370

35%

1,182

3,891

5,986

Noninterest expense:








     Salaries and related benefits

2,732

2,507

225

9%

2,595

9,957

8,865

     Occupancy and equipment expense

508

548

(40)

-7%

473

2,009

2,273

     Write down of other real estate owned

0

0

0

0%

425

557

1,571

     FDIC insurance premium

202

300

(98)

-33%

198

1,319

1,016

     Data processing fees

94

92

2

2%

115

389

270

     Professional service fees

255

229

26

11%

304

1,016

1,289

     Deferred compensation expense

150

136

14

10%

146

533

493

     Goodwill impairment

0

0

0

0%

0

0

0

     Other expenses

1,543

885

658

74%

1,060

4,148

2,911

          Total noninterest expense

5,484

4,697

787

17%

5,316

19,928

18,688

Income before provision for income taxes

3,150

2,585

565

22%

2,930

9,127

7,529

     Provision for income taxes

923

905

18

2%

857

2,444

2,043

Net Income

2,227

1,680

547

33%

2,073

6,683

5,486

Discontinued Operations:








(Loss) income from discontinued operations

(746)

1,210

(1,956)

-162%

622

1,513

2,104

Income tax (benefit) expense associated with income from discontinued operations

(239)

499

(738)

-148%

271

392

1,116

Net (loss) income from discontinued operations

(507)

711

(1,218)

-171%

351

1,121

988

Less: Net income from discontinued operations attributable to noncontrolling interest

0

348

(348)

-100%

172

549

254

Net income attributable to Bank of Commerce Holdings

$ 1,720

$ 2,043

$ (323)

-16%

$ 2,252

$ 7,255

$ 6,220

Less: preferred dividend and accretion on preferred stock

250

334

(84)

-25%

248

943

940

Income available to common shareholders

$ 1,470

$ 1,709

$ (239)

-14%

$ 2,004

$ 6,312

$ 5,280

Basic EPS attributable to continuing operations

$ 0.12

$ 0.08

$ 0.04

50%

$ 0.11

$ 0.34

$ 0.30

Basic EPS attributable to discontinued operations

$ (0.03)

$ 0.02

$ (0.05)

-250%

$ 0.01

$ 0.03

$ 0.05

Average basic shares

16,147

16,991

(844)

-5%

16,302

16,991

14,951

Diluted EPS attributable to continuing operations

$ 0.12

$ 0.08

$ 0.04

50%

$ 0.11

$ 0.34

$ 0.30

Diluted EPS attributable to discontinued operations

$ (0.03)

$ 0.02

$ (0.05)

-250%

$ 0.01

$ 0.03

$ 0.05

Average diluted shares

16,147

16,991

(844)

-5%

16,302

16,991

14,951


 

Table 14



BALANCE SHEET

(Dollars in thousands)

September 30,

September 30,

Change

June 30,

ASSETS

2012

2011

$

%

2012

Cash and due from banks

$ 40,541

$ 30,710

$ 9,831

32%

$ 40,035

Interest bearing due from banks

23,893

27,476

(3,583)

-13%

24,035

     Total cash and cash equivalents

64,434

58,186

6,248

11%

64,070

Securities available-for-sale, at fair value

194,928

165,704

29,224

18%

201,348

Securities held-to-maturity, at amortized cost

18,808

0

18,808

100%

0

Portfolio loans

604,695

599,356

5,339

1%

596,105

Allowance for loan losses

(10,560)

(10,590)

30

0%

(12,497)

     Net loans

594,135

588,766

5,369

1%

583,608

Mortgage loans held for sale

27,875

53,748

(25,873)

-48%

37,886

Total interest earning assets

910,740

876,994

33,746

4%

899,409

Bank premises and equipment, net

9,617

9,417

200

2%

9,709

Goodwill and other intangibles

63

0

63

100%

113

Other real estate owned

3,052

1,665

1,387

83%

2,647

Assets attributable to discontinued operations

0

18,706

(18,706)

-100%

32,216

Other assets

33,538

31,979

1,559

5%

30,948

TOTAL ASSETS

$ 946,450

$ 928,171

$ 18,279

2%

$ 962,545







LIABILITIES AND STOCKHOLDERS' EQUITY






Demand – noninterest bearing

$ 114,856

$ 100,778

$ 14,078

14%

$ 118,386

Demand – interest bearing

223,687

175,745

47,942

27%

207,307

Savings accounts

91,666

94,519

(2,853)

-3%

89,405

Certificates of deposit

261,410

280,887

(19,477)

-7%

268,102

     Total deposits

691,619

651,929

39,690

6%

683,200

Securities sold under agreements to repurchase

13,964

15,701

(1,737)

-11%

14,378

Federal Home Loan Bank borrowings

100,000

111,000

(11,000)

-10%

100,000

Junior subordinated debentures

15,465

15,465

0

0%

15,465

Liabilities attributable to discontinued operations

0

11,981

(11,981)

-100%

23,532

Other liabilities

14,049

9,339

4,710

50%

12,379

     Total Liabilities

835,097

815,415

19,682

2%

848,954







Total Equity – Bank of Commerce Holdings

111,353

109,847

1,506

1%

110,115

Noncontrolling interest in subsidiary

0

2,909

(2,909)

-100%

3,476

     Total Stockholders' Equity

111,353

112,756

(1,403)

-1%

113,591







TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$ 946,450

$ 928,171

$ 18,279

2%

$ 962,545













 

Table 15





AVERAGE BALANCE SHEET (Year to Date)

(Dollars in thousands)

September 30,

September 30,

December 31,

December 31,

December 31,


2012

2011

2011

2010

2009

Earning assets:






     Loans

$ 640,122

$ 634,945

$ 634,949

$ 640,213

$ 589,336

     Tax exempt securities

76,151

50,330

52,467

42,172

28,384

     US government securities

0

24,661

19,182

27,423

8,606

     Mortgage backed securities

63,255

68,422

67,052

48,972

53,722

     Other securities

68,962

41,828

44,664

15,702

17,313

     Interest bearing due from banks

49,389

67,560

64,399

70,911

50,790

     Fed funds sold

0

0

0

995

13,438

          Average earning assets

897,879

887,746

882,713

846,388

761,589







Cash and DFB

9,926

2,240

2,251

1,781

3,638

Bank premises

9,529

9,531

9,489

9,814

10,322

Other assets

32,696

21,122

25,116

48,116

28,662

          Average total assets

$ 950,030

$ 920,639

$ 919,569

$ 906,099

$ 804,211







Interest bearing liabilities:






     Demand - interest bearing

$ 193,687

$ 154,882

$ 157,696

$ 141,983

$ 145,542

     Savings deposits

89,543

91,918

91,876

76,718

62,846

     CDs

297,445

301,607

296,034

321,051

317,417

     Repurchase agreements

13,955

14,723

14,805

12,274

11,006

     Other borrowings

127,151

148,418

139,331

134,255

122,057


721,781

711,548

699,742

686,281

658,868

Demand - noninterest bearing

112,403

96,802

100,722

92,433

69,250

Other liabilities

4,609

4,908

10,997

31,748

9,467

Shareholders' equity

111,237

107,381

108,108

95,637

66,626

          Average liabilities & equity

$ 950,030

$ 920,639

$ 919,569

$ 906,099

$ 804,211

 

BOCH is a NASDAQ National Market listed stock.  Please contact your local investment advisor for purchases and sales.  Investment firms making a market in BOCH stock are:

Raymond James Financial / John T. Cavender
555 Market Street
San Francisco, CA (800) 346-5544

Sandler & O'Neil / Bryan Sullivan
919 Third Avenue, 6th Floor
New York, NY 10022 (888) 383-3112

McAdams Wright Ragen, Inc. / Joey Warmenhoven
1121 SW Fifth Avenue
Suite 1400
Portland, Oregon 97204 (866) 662-0351

Stifel Nicolaus / Perry Wright
1255 East Street #100
Redding, CA 96001 (530) 244-7199

SOURCE Bank of Commerce Holdings

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